Home > Prospects Weekly: The post-crisis recovery in imports across regions has been uneven, Gross capital flows to developing countries in June were robust, Spreads on emerging market bonds, including those from Sub-Saharan Africa, have declined

Prospects Weekly: The post-crisis recovery in imports across regions has been uneven, Gross capital flows to developing countries in June were robust, Spreads on emerging market bonds, including those from Sub-Saharan Africa, have declined

Submitted by Global Macroeconomics Team
On Tue, 07/15/2014

The post crisis recovery in imports has been uneven. Developing countries have recorded robust growth across all import groups, whereas in high-income countries, reflecting weaker domestic demand conditions, growth especially in durable and capital goods imports has been relatively weaker. Supported by the current favorable financial market conditions, gross capital flows to developing countries in June were robust. The easing of financial market conditions in recent months is reflected in the decline in developing country bond spreads, including those from Sub-Saharan Africa.

The post-crisis recovery in imports across regions has been uneven. The recovery of merchandise imports has been much more solid in developing countries (above 60 percent of pre-crisis levels) than in high-income economies (less than 6 percent). In developing countries, the recovery has been broad-based, however in high-income countries import growth continues to be weaker in those products whose purchase can be postponed, such as durable consumer goods and capital goods. In the United States and Japan, where the recovery is more advanced, capital goods imports are some 21% above pre-crisis levels. In contrast, in the Euro Area, where a self-sustaining recovery has only recently begun, capital goods imports are some 25% lower than pre-crisis levels. With high-income countries accounting for some two-thirds of global trade, the projected pick-up in growth there, in particular in the Euro Area – one of the world’s largest trading bloc- bodes well for an acceleration in global trade, in particular of capital and durable consumer goods. Nonetheless, the expected acceleration in global trade is unlikely to bring back the growth rates observed during the boom years. This reflects both the moderate (projected) pace of recovery of GDP growth in high-income economies (from 1.3 percent in 2013 to 2.4 percent in 2016) and a secular decline in trade-growth elasticities with respect to a decade ago.

Gross capital flows to developing countries in June were robust. Gross capital flows to developing countries amounted to $63.1 billion in June, up sharply from $42.2 billion in the previous month and the $58.6 billion monthly average during January-March. The strong pick-up in June was largely due to a surge in syndicated bank lending - a reflection of large loans to corporates in East Asia and the Latin American regions. Both bond and equity flows were strong as well, helped by a surge in Mexico’s equity issuance and large bond issuance by borrowers in Europe and Central Asia (including Bulgaria and Turkey). On a year-to-date basis, investment grade sovereign and corporate borrowers have dominated primary bond market activity, accounting for some 77 percent of developing country bond issuances. However, unrated and low-rated sovereign borrowers have also returned to international bond markets.

Consistent with the easing of global financial market conditions, spreads on emerging market bonds, including those from Sub-Saharan Africa, have declined. Indeed since mid-February spreads on Sub-Saharan African sovereign bonds have declined between 70 and 140 basis points. The favorable environment has supported recent successful Eurobond issuances from both Kenya ($2bn in June) and Zambia ($500m in April). Cote D’Ivoire, Ghana and Senegal are also poised to tap into the international bond market. Nonetheless, the current low interest rate environment is unlikely to persist through the medium-to-long term, as with the strengthening of high-income economies, in particular that of the United States, monetary policy tightening is projected to commence in 2015. This will raise borrowing costs in international capital markets. While debt-to-GDP ratios remain moderate for Sub-Saharan Africa as a whole, some economies in the region have much higher debt ratios and face persistent macroeconomic imbalances - high fiscal and current account deficits-, which could make them more vulnerable when global financial market conditions tighten. These concerns are also reflected in recent credit rating downgrades. Mozambique, Uganda and South Africa.